Can you refinance an ARM loan to a fixed-rate mortgage?

An adjustable-rate mortgage (ARM) has an interest rate that can change over time after a fixed introductory period. That means your payments can rise or fall, which can make it difficult for homeowners to predict their future housing costs. In some cases, your payment could rise to the point of not being affordable.

For that reason, ARMs aren’t a good fit for everyone. If you have an ARM, you may wonder whether you can refinance it to a fixed-rate loan.

The good news is that you can refinance¹ an ARM loan. By doing so, you’ll get a new interest rate and loan term. Also, refinancing allows you to remove a co-borrower from the loan and remove private mortgage insurance.

Adjustable-rate mortgage vs. fixed-rate mortgage

ARMs and fixed-rate loans are both options for financing the purchase of real estate. They share many features. For example, ARMs and fixed-rate mortgages can both have terms as long as 30 years.

However, there are also key differences. Where fixed-rate loan rates don’t change after you get the loan, ARM rates can adjust.

This table covers some of the key differences between ARMs and fixed-rate loans.

What is an adjustable-rate mortgage?

An ARM is a mortgage with an interest rate that changes at regular intervals based on market conditions. When you first take out an ARM, your rate is fixed for a time and usually is lower than the rate for a fixed-rate loan. Once that period ends, your rate adjusts, usually once a year.

As you’re shopping, notice how lenders identify ARMs. For example, a 7/1 ARM has a fixed rate for 7 years, then the rate adjusts once a year.

What are ARM rate caps?

ARM rate caps limit how much your interest rate can change. These caps protect borrowers from extreme rate hikes and fall into three broad categories:

• Initial adjustment cap: Limits how much an interest rate can increase the first time it adjusts after the fixed-rate period ends.
• Subsequent adjustment cap: Limits how much the interest rate can increase in subsequent adjustments.
• Lifetime adjustment cap: Limits how much your rate can increase overall from the initial rate.

What is a fixed-rate mortgage?

A fixed-rate mortgage has an interest rate that stays the same over the life of the loan. Your monthly payment for principal and interest will stay the same each month. However, property taxes and home insurance are included in your mortgage payment, and those rates can fluctuate over the year. Still, since the principal-and-interest payment doesn’t change, this type of mortgage can make budgeting easier for most borrowers.

How is interest on a fixed-rate mortgage determined?

Different factors determine the mortgage interest rate for fixed-rate loans.

• Federal Reserve policy: While the Fed doesn’t directly affect interest rates, its responsibility to raise or lower the federal funds rate does. When the Fed raises interest rates to combat inflation, mortgage rates typically go up as well, and vice versa.
• Loan terms: Whether you choose a 15- or 30-year loan term can affect the interest rate you receive. In general, 15-year mortgage terms help you secure a lower interest rate because you’ll be seen as less of a risk to the lender.
• Credit score: Borrowers with excellent credit receive the lowest interest rates on their mortgages. Having a lower credit score doesn’t necessarily exclude you from taking out a mortgage, but your lender will charge you more in interest to make up for the additional risk.
• Down payment: Many lenders will let you take out a mortgage with a down payment as low as 3%², but making a larger down payment could help you secure lower interest rates.

Reasons to consider refinancing your ARM loan

Refinancing your ARM lets you get a new mortgage that may have better terms. These are some of the top reasons to consider refinancing.

• Swap from an ARM to a fixed-rate loan: One of the top reasons to refinance an ARM is to avoid rate adjustments by swapping from an ARM to a fixed-rate loan. If your ARM is about to get a new rate, you can instead swap to a fixed-rate loan, which may have a more advantageous rate.
• Lock in a low rate: If market rates fall significantly, you might consider refinancing to a fixed-rate loan so you can lock in a low rate for the long term, which could save you money.
• Budget predictability: ARM rates and monthly payments often change every year. Refinancing can offer predictability to your budget by fixing your loan’s rate and payment in place.
• Lower your monthly payment: If you refinance to a loan with a longer repayment term or a lower rate, you can reduce your monthly payment, which may make your loan more affordable.

How to refinance an ARM loan to a fixed-rate mortgage

If you’re thinking about refinancing an ARM, follow these steps.

1. Compare and choose a lender

To start, you’ll want to shop around and compare offers from multiple lenders. Look for lenders that have a good reputation for service and that offer interest rates that are competitive. You can look at current Rocket Mortgage rates to see what may be available.

This process can take a few weeks as you gather information and compare lenders to find the best one for your needs.

2. Fill out your application

Once you’ve settled on a lender, it’s time to fill out an application. You can usually do this in a few hours, though underwriting will take longer.

With an online lender like Rocket Mortgage, you can go through the whole application online. You’ll have to provide information about your current loan, the property you own, your financial situation, and your credit.

3. Provide the necessary documentation

Once you submit your application, your lender will begin the underwriting process. This can often take a week or more as your lender does a deep dive into your credit and finances to make sure you’re a responsible borrower.

Expect to provide a number of documents to support your application, such as:

• Recent income tax returns
• Recent W-2 forms
• Recent pay stubs
• 1099 forms
• Business tax returns
• Checking and savings account statements
• Retirement or investment account statements
• Documents for the sale of assets
• Proof and verification of gift funds deposited in the last 2 months
• Documents that show your debts, such as student loans, auto loans, etc.

4. Lock in your interest rate

Once you’re preapproved, you can ask your lender for a rate lock. This will set the rate that you’ll pay for the mortgage so that it doesn’t change before closing, even if market rates rise or fall.

Some lenders offer an automatic rate lock while others make your request. There may be a fee for locking your rate, especially if you want to lock it for longer than a month.

5. Appraise your home

As part of the refinancing process, your lender will order a home appraisal to determine your property's fair market value. A licensed appraiser will assess your home’s condition, compare it to similar properties, and provide a valuation report. Then, lenders will determine if they can approve your loan application and how much you can borrow. More specifically, an appraisal plays a key role in calculating your loan-to-value ratio, determining your home’s equity, and setting your interest rate.

6. Close on your new loan

The final step in the process is to close on your new loan. This involves signing all of the documents finalizing your new mortgage. The process usually takes an hour or two. Depending on the lender, you may have to visit an attorney’s office or you may be able to sign the paperwork at home.

During closing, you’ll pay any fees, such as closing costs, related to the refinance. Often, these fees are included in the new loan’s balance.

Requirements for refinancing an ARM

You’ll need to meet lender requirements to refinance an ARM, such as:

• Proof of income: You’ll need to show you have enough money coming in to afford the new loan. This income level can vary.
• At least 20% equity: Most lenders require at least 20% equity, though some allow less.
• Low debt-to-income ratio: The recommended DTI ratio is under 43% because it indicates responsible borrowing habits.
• Good credit: A higher credit score improves your chances of qualifying and securing a competitive interest rate.
• Mortgage seasoning: Most lenders require you to have owned the home and made on-time payments for at least six months before you can refinance.

The bottom line: Refinancing your adjustable-rate mortgage could make sense

Refinancing an ARM lets you trade your adjustable rate for one that will not change. That can help you lock in a low rate or simply avoid rate adjustments that can cause unpredictability in your housing costs.

If you’re ready to refinance an ARM or considering buying a house, you can reach out to Rocket Mortgage for your next home loan.

¹ Refinancing may increase finance charges over the life of the loan.

² The 3% down payment option is only available on certain conventional loan products and is not available in all states. Additional terms and conditions may apply.